Stock Trading – Using Options is an ICT approach to participating in bullish stock-market swing trades without necessarily purchasing a large number of shares outright.
This concept was taught by Michael J. Huddleston, the founder of ICT (Inner Circle Trader), in the 2017 ICT Private Mentorship Core Content Month 10.
The method begins with identifying fundamentally strong stocks that are already receiving institutional sponsorship. ICT then combines this stock-selection process with seasonal tendencies, Index SMT divergence, market structure and premium-discount analysis.
Options are not used to compensate for weak analysis. They are used only after the trader has identified a strong company, a favourable market environment and a probable directional move.
Michael J. Huddleston explains the objective:
“You’re looking for velocity.”
The focus is not necessarily on holding a stock for years. It is to capture a meaningful seasonal swing and use an appropriately selected option to participate in that movement.
What Are Stock Options?
A stock option is a contract connected to the price of an underlying stock.
In a bullish scenario, a trader may consider a call option.
A call option can increase in value when the underlying stock rises. This allows the trader to participate in a bullish move while committing less capital than may be required to purchase a large number of shares.
However, using less capital does not mean the trade carries no risk.
An option can lose value quickly when:
- The stock moves in the wrong direction
- The expected move takes too long
- The stock remains stagnant
- The option reaches expiration
- The broader market changes direction
For this reason, stock selection and market timing must come before option selection.
The Purpose of Using Options
ICT presents options as a way to seek greater percentage returns from a properly anticipated stock swing.
A stock does not always need to rise by an enormous amount for the option to appreciate significantly.
Michael J. Huddleston states:
“If you double, triple, you quadruple your money with a call option that costs you very little money, who cares if the stock price only goes up eight dollars or ten dollars?”
The central idea is capital velocity.
Instead of tying up a large amount of money in shares for a long period, the trader attempts to capture a defined swing, realise the profit and later deploy that capital into another opportunity.
This is very different from buying a stock and holding it indefinitely.
Options Do Not Replace Stock Analysis
The biggest mistake is beginning with the option chain before analysing the underlying company.
The correct order is:
- Analyse the broader stock market.
- Identify the seasonal tendency.
- Find the strongest industry groups.
- Select leadership stocks.
- Confirm institutional sponsorship.
- Study the stock’s technical structure.
- Determine the likely price objective.
- Only then evaluate the available option.
The option is the trading vehicle.
The stock, market direction and institutional narrative create the actual opportunity.
Begin With Market Direction
The broader market should support the expected stock move.
ICT compares the three major US averages:
- Dow Jones Industrial Average
- S&P 500
- Nasdaq
Approximately three out of four stocks tend to follow the general market direction. Therefore, buying call options during a confirmed market decline can significantly reduce the probability of success.
Before considering a bullish option trade, determine whether:
- The broader market is in an uptrend
- The indices have traded into discount
- Bullish Index SMT is present
- A seasonal bullish period is beginning
- Institutional order flow supports higher prices
The trader should avoid selecting bullish options simply because an individual stock appears inexpensive.
Seasonal Timing for Stock Options
ICT divides the calendar into periods that are generally more favourable for buying or selling stocks.
The primary bullish periods discussed are:
- February through May
- The latter part of September or early October through the end of the year
The bearish or corrective period is commonly associated with:
- May through approximately the middle of September
These tendencies are not guarantees.
They provide a calendar framework for deciding when bullish stock and call-option ideas deserve more attention.
The trader should begin studying candidates before the bullish window becomes obvious.
Why Seasonal Timing Matters
Institutional investors often build large positions gradually.
If the broader market is expected to strengthen during a particular part of the year, institutions may begin accumulating leadership stocks before the seasonal rally becomes visible.
This early accumulation may appear as:
- Higher lows
- Failure to decline with the index
- Strong weekly closes
- Support at bullish order blocks
- Increasing institutional ownership
- Breakouts through old highs
An option selected after the move becomes extended may be more expensive and exposed to a retracement.
The preferred condition is to identify the stock while accumulation is still taking place.
Selecting the Underlying Stock
The quality of the underlying stock is the foundation of the option trade.
ICT combines fundamental selection with technical analysis.
The strongest candidates generally have:
- Strong current earnings
- Strong annual earnings
- Something new attracting attention
- A favourable share supply
- Leadership within the industry
- Institutional sponsorship
- A supportive broader market
These factors closely resemble the CAN SLIM stock-selection framework developed by William J. O’Neil.
ICT adds his own concepts of:
- Institutional order flow
- Market structure
- Seasonal timing
- Index SMT divergence
- Premium and discount arrays
- Liquidity objectives
Current Earnings
The company should show meaningful recent earnings growth.
ICT discusses looking for quarterly earnings growth of at least approximately 25%, with stronger growth considered preferable.
Acceleration is especially important.
For example:
- One quarter shows 25% growth
- The next shows 50%
- The latest shows 90%
This suggests that the company’s business performance is gaining momentum.
A bullish option trade becomes more convincing when the company’s underlying earnings are also improving.
Annual Earnings
The company should also have a record of strong annual growth.
ICT discusses looking for annual earnings growth of approximately 25% during each of the previous three years.
Other desirable characteristics include:
- Strong industry profit margins
- Consistent business growth
- Healthy return on equity
- Improving long-term profitability
Quarterly strength may create short-term excitement, but annual growth helps confirm that the company is not benefiting from a single temporary event.
The New Factor
Strong growth stocks commonly have something new attracting investors.
This may include:
- A new product
- A new service
- New management
- New leadership
- A new industry condition
- A new price high
- A relatively new public company
The new development gives investors a reason to revalue the company.
Michael J. Huddleston explains that traders should look for:
“Something new, something fresh, something exciting about that company.”
Without renewed attention, even a profitable company may remain stagnant.
Supply of Shares
The number of shares available to investors can influence how easily a stock reprices.
Suppose two companies have similar earnings, strong leadership and institutional sponsorship.
One has a much smaller available share supply.
When institutions begin buying that company, the limited supply may allow the stock to rise more aggressively.
ICT also expresses a preference for established stocks priced above approximately $20 per share rather than very low-priced speculative shares.
The objective is to find quality stocks with enough liquidity for trading but not such an enormous share supply that institutional buying has little impact.
Leaders vs Laggards
The trader should select the strongest stock, not the cheapest stock.
Leadership stocks commonly show:
- Superior earnings growth
- Strong sales
- Better price performance
- Strength within a leading industry group
- Institutional sponsorship
- Breakouts toward new highs
Michael J. Huddleston explains:
“The strong got stronger.”
A stock already moving higher is not automatically too expensive.
If it is leaving discount and moving toward buy-side liquidity, it may still offer a low-resistance continuation.
The goal is to buy strength with a clear institutional reason, not chase random momentum.
Institutional Sponsorship
Mutual funds, pension funds, banks and insurance companies provide the capital that can drive sustained stock-price advances.
A strong option setup should therefore be supported by evidence that institutions are buying the underlying company.
ICT discusses looking for:
- At least ten mutual funds holding the stock
- Increasing sponsorship over two or three quarters
- Strong institutional rankings
- Persistent higher prices
- Accumulation during market weakness
Institutions cannot usually establish their entire position in one transaction.
They buy repeatedly, often at progressively higher prices.
This continued demand can produce the sustained swing needed for an option to appreciate.
Using Investors Business Daily
ICT recommends Investors Business Daily as a resource for fundamental stock analysis.
The publication can help traders research:
- Quarterly earnings
- Annual earnings
- Industry rankings
- Relative strength
- Institutional sponsorship
- Growth-stock candidates
The resource does not replace ICT technical analysis.
It is used to identify companies with a legitimate fundamental basis for institutional buying.
The trader then applies ICT concepts to determine whether the stock is technically positioned for a favourable move.
Relative Strength and Index SMT
A strong stock frequently refuses to fall when the broader market makes a lower low.
For example:
- The Dow makes a lower low.
- The stock forms a higher low.
- One of the three major indices also fails to confirm the market decline.
- The stock is trading in discount.
- Institutional sponsorship is increasing.
This creates a combination of:
- Bullish Index SMT
- Stock-relative strength
- Institutional accumulation
- Seasonal support
The stock becomes a stronger candidate for a bullish swing and a possible call option.
Technical Structure of the Stock
Strong fundamentals do not automatically create a trade.
The chart must also be technically positioned for expansion.
A favourable bullish stock may have:
- Higher weekly highs
- Higher weekly lows
- Bullish order blocks supporting price
- A fair value gap acting as support
- A clean old high above price
- A low-resistance liquidity run
- Price trading from discount
- A recent sell-side liquidity raid
ICT warns that some companies may receive strong fundamental ratings but still lack the technical conditions required for a trade.
The stock must have both a reason to rise and a clear path to the objective.
Low-Resistance Liquidity Runs
Stocks are naturally predisposed to seek higher prices over time, particularly when institutions are accumulating them.
A strong candidate may trade immediately below:
- An old weekly high
- Equal highs
- A yearly high
- An all-time high
- Clear buy-side liquidity
When little resistance exists between the current price and that objective, the stock may offer a low-resistance liquidity run.
This is more attractive than a stock that must rally a large distance through multiple resistance levels before reaching its old high.
The cleaner the path, the stronger the potential option setup.
Why Call Options Suit Swing Trading
ICT does not frame stock options as tools for constant day trading.
The preferred approach is to capture a swing created by persistent institutional buying.
Large funds accumulate shares over time.
As they continue purchasing, the stock may produce a sustained movement rather than a brief intraday fluctuation.
Michael J. Huddleston states:
“You want to be in there capturing swing trades in stocks.”
The option should therefore be selected around a larger directional thesis rather than a random short-term prediction.
Capital Velocity
Capital velocity refers to the ability to complete one profitable swing and then redeploy the capital into another opportunity.
The process is:
- Identify a seasonally supported stock.
- Confirm institutional accumulation.
- Purchase an appropriately selected call option.
- Hold during the expected swing.
- Take profit at a logical premium objective.
- Move the capital into a future setup.
This approach avoids leaving capital tied up indefinitely in a stock that may enter a long consolidation.
The ICT View of Buy and Hold
ICT does not favour holding every stock for many years.
His approach is to buy during favourable conditions, allow the stock to appreciate and sell when other investors become increasingly enthusiastic.
He explains:
“I believe in the buy, hold it for something, for a premium, let everybody else like it, fall in love with it, want to buy it from us, and we’ll sell it to them.”
This means entering during accumulation and exiting after price reaches a logical premium.
The trader is not attempting to capture every dollar of the company’s long-term growth.
Identifying the Price Objective
Before selecting an option, the trader should know where the underlying stock is expected to trade.
Potential objectives include:
- Old weekly high
- Equal highs
- All-time high
- Weekly fair value gap
- Weekly bearish order block
- Premium area of the dealing range
- Buy-side liquidity
The projected stock movement helps determine whether the option has enough potential to justify the risk.
Without a price objective, the trader cannot judge:
- Required movement
- Expected holding period
- Reasonable profit target
- Whether the option is affordable
- Whether the trade offers sufficient velocity
Do Not Expect Every Option to Perform Equally
A watchlist may contain several strong stocks.
Some options will appreciate more than others.
One company may produce an explosive breakout, while another provides only a modest advance.
This is normal.
The objective is not to predict the single best stock with absolute certainty.
The objective is to use a repeatable selection process that consistently identifies strong candidates.
Michael J. Huddleston notes:
“Some of them aren’t going to do as well as the others.”
A diversified but focused selection process may reduce dependence on one idea.
A Practical Bullish Option Process
A practical ICT-style approach may look like this:
- Identify an upcoming bullish seasonal window.
- Confirm that the broader market is technically sound.
- Compare the Dow, S&P 500 and Nasdaq for bullish SMT.
- Screen fundamentally strong companies.
- Prioritise current and annual earnings growth.
- Identify something new attracting investor attention.
- Evaluate the available share supply.
- Select leaders rather than laggards.
- Confirm increasing institutional sponsorship.
- Review weekly and daily market structure.
- Look for price to trade into discount.
- Identify the upside liquidity objective.
- Estimate the expected stock swing.
- Review the available call options.
- Select an option whose cost and structure fit the trade plan.
- Hold for the anticipated swing rather than reacting to every small fluctuation.
- Take profit when the stock reaches the planned premium objective.
Stock Option Watchlist Checklist
Before considering a bullish option, confirm:
- Is the market in or approaching a bullish seasonal period?
- Are the major indices technically positioned to rally?
- Is bullish Index SMT present?
- Does the company have strong quarterly earnings?
- Are annual earnings improving?
- Is there something new attracting attention?
- Is the stock a leader in its industry?
- Is institutional sponsorship increasing?
- Is the share supply reasonable?
- Is the weekly structure bullish?
- Has the stock resisted a broader market decline?
- Is price near discount?
- Is there a clean old high above price?
- Is the projected swing large enough?
- Is the option affordable within the risk plan?
- Is there a defined exit objective?
Common Mistakes
Selecting the Option Before the Stock
An inexpensive option is not necessarily a good opportunity.
Begin with the market and the underlying stock.
Ignoring the Broader Market
Most stocks follow the primary market direction.
A bullish company may still decline during a broad correction.
Buying Laggards
Weak stocks may appear cheap, but they often lack institutional sponsorship.
Focus on leadership.
Ignoring Fundamentals
A technically attractive chart may fail if the company lacks earnings growth or institutional interest.
Ignoring Technical Structure
Strong earnings alone do not guarantee immediate price appreciation.
The stock must also be technically positioned for expansion.
Using Options for Day Trading
ICT presents this approach as swing trading.
Constantly trading short-term option fluctuations can turn the process into speculation rather than structured analysis.
Expecting Every Option to Quadruple
Large returns are possible, but they should not be treated as guaranteed.
Some candidates will move slowly or fail.
Holding Without an Objective
The trader should know where the stock is likely to encounter premium or buy-side liquidity.
Risking Too Much
The lower cost of an option does not justify excessive exposure.
A complete loss of the option premium must always be treated as possible.
Options and Risk
Options can offer significant percentage returns, but they also require disciplined risk control.
The trader must be comfortable losing the amount committed to the trade.
Risk should be based on:
- Total account equity
- Number of positions
- Option cost
- Expected holding period
- Quality of the underlying setup
- Distance to the stock objective
The possibility of doubling or tripling the option should never become an excuse for gambling.
The option should be treated as a defined-risk vehicle inside a broader professional trading plan.
Why This Approach Works
The framework combines multiple layers of analysis.
Seasonality identifies when institutions are historically more likely to favour stocks.
Fundamental analysis finds companies with legitimate growth.
Relative strength identifies leadership.
Institutional sponsorship confirms that large funds are participating.
ICT market structure identifies discount entries and premium objectives.
Options then provide a way to participate in the projected swing with a smaller initial capital commitment.
The edge does not come from the option itself.
It comes from correctly analysing the underlying stock and the broader market.
Final Thoughts
Stock Trading – Using Options is not about searching for cheap contracts or predicting random short-term price movements.
The ICT approach begins with selecting fundamentally sound leadership stocks during favourable seasonal periods.
The strongest candidates should display:
- Improving current earnings
- Improving annual earnings
- Something new attracting attention
- Limited or reasonable share supply
- Leadership within their industry
- Increasing institutional sponsorship
- Bullish market direction
- Strong technical structure
- A clear path toward buy-side liquidity
Once the stock has been selected, a call option can be used to participate in the expected swing.
The trader’s objective is capital velocity: capture the move, take profit at a logical premium and preserve capital for the next opportunity.
As Michael J. Huddleston explains:
“You need velocity, and you need to see something that’s consistently done every single year the same way.”
The option is only the vehicle. Seasonal timing, institutional sponsorship, relative strength and ICT price analysis create the trade.
